Coinbase (NASDAQ:COIN) CEO Brian Armstrong will likely opt to shut down Ethereum (ETH) staking rather than comply with OFAC’s requirements to censor the blockchain.
While decentralization attempts to make Ethereum censorship-resistant, Coinbase is estimated to hold a 15% market share in ETH assets. Being that Coinbase owns such a large share, the company has the potential to assist in censorship of Ethereum’s base-layer protocol.
Blockchain enthusiasts and Ethereum supporters dread this threat.
The censoring conversation stems from the recent sanctions on Tornado Cash, a digital asset mixing service built on Ethereum’s blockchain. While many use the application for privacy matters, it’s also used by hackers to wash cryptocurrencies, making them untraceable and completely private.
The U.S. government has made it illegal for users in the States to use Tornado Cash, citing ties to North Korean hackers funding the dictatorship’s nuclear weapons programs.
Tornado Cash’s front-end is blocked for U.S. users, as the front-end interface is run on centralized servers and easily controlled. However, in order to censor the application itself, the government would need to coordinate with large platforms that also operate as Ethereum Validators in order to censor Tornado Cash related transactions on Ethereum’s base-layer.
Why It Matters: Ethereum’s value is driven from its immutable, permissionless and uncensorable blockchain. If the government is able to successfully censor Tornado Cash, this opens the gates for the government to censor critical infrastructure on Ethereum, such as decentralized exchanges, lending protocols, and metaverse games for not collecting know-your-consumer (KYC) information on their users.
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At the moment, Ethereum validators on the beacon chain cannot censor Ethereum’s base-layer, as Ethereum still operates on Proof of Work.
However, the Ethereum merge is anticipated for next month, forking Ethereum into two chains: ETHPoW and ETHPoS. Once Ethereum transitions to Proof of Stake, corporations that run validator nodes have the potential to coordinate censorship to comply with government regulations. Censoring Ethereum may have extreme ramifications — as the once open, permissionless, and inclusive network could be gate kept by large corporations.
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